ESCOs and Performance Contractors
Energy Service Companies (ESCOs) and other performance contractors of government-owned buildings are eligible to claim Section 179D federal tax deductions for their work designing energy efficient publicly-owned buildings.
Designers of energy efficient buildings are allowed a 179D tax deduction of up to $1.80 per square foot of building space in publicly-owned buildings. The government entity can allocate the 179D tax deduction to the designer of the energy efficient system. Essentially the design firm takes the tax deduction in lieu of the government project owner, who does not pay taxes. This could provide significant tax benefits to a design firm who has government clients owning “green” building projects, including public universities, public schools, airports, courthouses, and other publicly-owned buildings.
This deduction applies to qualifying projects placed in service from Jan. 1, 2006 to Dec. 31, 2016. Projects completed in these prior years may qualify designers for tax refunds by amending past years' tax returns. Before a designer may claim the 179D tax deduction, with respect to property installed on or in a government-owned building, the designer must obtain the written allocation from the “authorized representative" of the government agency. In cases where there is more than one designer, the owner may either allocate the deduction to the primary designer, or, at the owner’s discretion, allocate the deduction amongst all of the designers.
A designer, under Section 179D guidelines, includes an “architect, engineer, contractor, environmental consultant, or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property.” This definition does not include someone that merely installs, repairs, or maintains the property.
Federal agencies that have established policy regarding the allocation of the 179D deduction include the Department of Defense and the General Services Administration. These policies guide project managers in understanding to whom the deduction should be allocated and the standard approach in allocating the deduction. Some state agencies also have established state-wide policy regarding this allocation, including North Carolina and Texas.